BIS now part of the neo-liberal propaganda apparatus

Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.
The first speech – Financial and real sector interactions: enter the sovereign ex machina – was given on November 15, 2011 by one Jaime Caruana who is the General Manager of the Bank of International Settlements. He gave the paper in Mumbai at a conference on Financial sector regulation.

He begins with the central proposition of his Speech:

As the latest events have reminded us, financial stability depends not only on the link between banks and the corporate and household sectors1 but also on their links with the sovereign. The sovereign must be prepared to act as ultimate backstop for the financial system. But this requires that fiscal buffers be built up in good times. Otherwise, the sovereign can itself become a source of financial instability as its credit risk damagingly interacts with that of banks and other private sector entities.

I agree that the “sovereign must be prepared to act as ultimate backstop for the financial system”. A monetary system cannot be stable unless the currency issuer ensures that there is enough currency available at all times to satisfies the needs of the system. Given monopoly issuance of the currency, that role is a unique one that has to be played by the government – consolidated as the treasury and central bank.

The essential additional point – an prior to the political willingness (“must be prepared”) is that government has to actually possess the capacity to undertake that role.

At which point I asked myself – what are the “latest events” that he was referring to which motivated this introduction? He could not have been talking about the US, Japan, Britain, Australia, Canada and most nearly all other nations.

There is no financial instability in those nations that can be traced to fiscal policy. Which makes his inference that “fiscal buffers built up in good times” – by which he means budget surpluses – spurious at best.

Those nations always have the fiscal capacity to ensure there is financial stability in the private banking system. That capacity is independent of whether they have been running fiscal deficits in the past or surpluses. In every period, the government can choose how much discretionary net spending it desires without being constrained by past fiscal decisions.

That is not the same thing as saying that the government can choose the overall budget outcome in any period. As we know, the final budget balance is largely determined by non-government spending and saving decisions via the impacts of these on the automatic stabilisers. So, other things being equal, when private spending is weak, there will be a tendency for the budget outcome to move into deficit or increase the deficit as taxation revenue declines and welfare spending rises.

The only qualification to the point that previous budget decisions do not impact on the choices faced by the government in the current period is that if budget deficits, for example, were providing sufficient support to aggregate demand such that the economy was at full employment, then any further fiscal injection would have to be accompanied by a reduction in private spending via taxation increases. But that doesn’t negate the point I was making.

So I conclude that the BIS General Manager is only referring to nations that do not have the capacity to maintain financial stability as a result of ceding their currency-issuing status – to wit, the Eurozone countries. Other governments that have borrowed heavily in foreign-currencies and/or peg their currencies fall into the same boat for different reasons.

But it is clear that the Eurozone nations use a foreign currency and do not have direct control over the central bank that issues the currency they use. They all face credit risk – from Germany down to Greece – and as a consequence can become a source of financial instability.

The reason is entirely because they use a foreign currency and have to get access to it in order to spend via taxation and borrowing. Deficits then become an issue if the lenders (bond markets) take a view that there is a risk of default.

The problem is the link between the government and the currency it uses which is endemic to the poorly designed EMU. The only lasting solution is to abandon that monetary system and re-align the currency-issuance with the fiscal decision-making (which, in turn, should be accountable to a specific voting cohort – to ensure democracy rules rather than amorphous power elites and bond markets).

The proposed fiscal union for the EMU is not that type of solution. It will make matters worse because it will impose damaging restrictions on fiscal policy which will hamper growth and make the task of satisfying the bond markets even more difficult. The proposed fiscal union is a misnomer – it is, in fact, nothing more than a tighter straitjacket.

The BIS General Manager however made no such qualification and by leaving his comments as being applicable to all monetary systems (fiat and the EMU) he deliberately mislead his audience and further perpetuated the types of myths that are, for example, crucifying the British economy at present.

He then moved on to outline how the private banking system becomes “more vulnerable to any … downturn” after a period of leverage (extending credit). There is no rocket science involved here.

As he noted:

… excessive leverage leaves banks more vulnerable to any subsequent downturn in economic activity and asset prices. At the same time, they are hit with a rising tide of delinquencies and defaults … [which] … become a major source of weakness for banks

When borrower distress undermines their balance sheets, banks are prevented from extending credit even to healthy borrowers. It is this combination of weak balance sheets and capital deprivation that prevents credit from flowing.

That is, banks are capital constrained not reserve constrained. When they have sufficient capital, they will then lend to any credit-worthy customer that comes through the door. They do not need reserves to do that – they attend to their reserve requirements as a sequentially separate operation.

The important point is that the private sector – as the user of the currency – always faces default risk – and cannot go on borrowing (overall) indefinitely to drive economic growth. Eventually, that growth strategy fails.

A crisis then emerges if banks “find that raising external equity becomes especially difficult as problem loans escalate, not least if investors have trouble assessing the size and distribution of losses”.

As we saw in the early days of the current crisis, governments were “forced to inject equity into banks” – or as the BIS General Manager suggests:

Although in modern Greece, the national government does not have that capacity and in attempting to serve that function (for example, the massive bailouts by Ireland) they worsen the problems faced by not using a currency they issue under monopoly conditions.

But truly sovereign nations (that is, those that issue their own currency and float it on international markets) can always bail their banks out as well as guaranteeing deposits.

That does not mean that these governments should do that. I would have nationalised a lot of the banks that the sovereign nations provided support to. The fact is that the bailouts allowed the failing banks not only to recover and continue paying massive salaries to their management but also provided them with margins to arbitrage within (that is, riskless trading opportunities) and make enormous profits for their shareholders.

The bailouts did very little to prevent foreclosures on mortgagees that lost their jobs and could no longer service their debts.

In BIS General Manager’s description of the way a private financial crisis can result is not controversial. But then he oversteps by claiming that the private debt crisis becomes a sovereign debt crisis”.

He says:

A remarkable feature of Europe’s sovereign debt strains is the role played by sovereigns that had spent years apparently on the right side of the Maastricht criteria, keeping a prudent lid on both deficits and debt. Anyone predicting sovereign debt downgrades in 2005 would hardly have listed Ireland or Spain.
In the event, hidden weaknesses in financial sector balance sheets fed through to the sovereign … There are two important transmission channels from banks to sovereigns.

Note the sleight of hand. His discussion that follows is largely about Europe but then he implies that there are “important transmission channels from banks to sovereigns” that turn a private debt crisis in to a sovereign debt crisis – as if this is a general discussion.

The two channels he notes are obvious:

1. “private credit booms can flatter the public sector’s accounts”. Governments get flooded with tax revenue when economic growth is strong. If that growth is built on a house of cards (increasing non-government deficits) then the fiscal position is illusory and will change.

So when the previous conservative government in Australia boasted that it was running surpluses (from 1996-2007) because it was a prudent macroeconomic manager they forgot to tell everyone that the only reason they were able to do that was because Australian households incurred record debt levels which kept consumption growth strong. This atypical period could not last and now the government is running deficits – as they should given a return by the private sector to more typical saving levels.

But for Ireland and Spain, their property booms certainly made their governments look like Grade A Maastricht Treaty performers but once the boom ended, then the BIS General Manager is correct to conclude that “these boom-related revenues fall away, revealing underlying fiscal deficits. And then when the banks run into trouble, the cost of rescuing and recapitalising them does grievous damage to the public accounts”.

His conclusion in this regard that this observation “This has important policy implications regarding the size of the fiscal space needed to prevent this situation” is incorrect as a general rule.

2. “If institutions have failed to build up sufficient capital and liquidity buffers during the boom, credit constraints become more significant, over and above any perceived deterioration in borrower quality” … and that can “choke off the credit supply” which “further dampens economic activity, thus widening the public sector deficit”. All true. But this only becomes a fiscal problem when the government is not sovereign in its own currency.

The BIS General Manager then really descends into propaganda.

He claims that to overcome this crisis:

… the sovereign can run up its own deficits and debt to the point where it becomes a source of weakness to those that hold that debt, including domestic banks … This is a recurring story,4 recently best exemplified by Greece. One can see in credit default swaps on the Greek sovereign and Greek banks how the impairment of the sovereign’s creditworthiness has affected the banks’ creditworthiness.

The footnote 4 (appending the “recurring story”) is to book – C Reinhart and K Rogoff, This time it’s different: Eight centuries of financial folly, Princeton University Press, 2009.

First, Greece is a good example of how a private sector crisis of a balance sheet origin can cause the national government (note: I don’t use the descriptor sovereign in the case of any non-currency issuing government) can increase its default risk.

But tying that into a general narrative (a “recurring story”) and giving authority to that statement by reference to Reinhart and Rogoff – is chicanery at best.

This is a popular piece of duplicity among financial commentators – the sky is falling and all governments are facing bankruptcy just read Reinhart and Rogoff! I wonder how many commentators who invoke this book have actually read it in detail and understood its applicability.

Of critical importance, quite apart from the other issues that one might have with Reinhart and Rogoff’s analysis (and I have many), one has to appreciate what they are talking about. Most of the commentators do not spell out the definitions of a sovereign default used in the book. In this way they deliberately (or through ignorance – one or the other) blur the terminology and start claiming or leaving the reader to assume that the analysis applies to all governments everywhere.

It does not. On Page 2 of the draft, Reinhart and Rogoff say:

We begin by discussing sovereign default on external debt (i.e., a government default on its own external debt or private sector debts that were publicly guaranteed.)

That is very clear. They are talking about problems that national governments face when they borrow in a foreign currency.

For a start, the US government has no foreign currency-denominated debt. Remember it has domestic debt owned by foreigners – but that is not remotely like debt that is issued in a foreign currency. Reinhart and Rogoff are only talking about debt that is issued in a foreign jurisdiction typically in that foreign nation’s currency.

Japan has no foreign currency-denominated debt. Many other advanced nations have no foreign currency-denominated debt.

It turns out that many developing nations do have such debt courtesy of the multilateral institutions like the IMF and the World Bank who have made it their job to load poor nations up with debt that is always poised to explode on them. Then they lend them some more.

But it is very clear that there is never a solvency issue on domestic debt whether it is held by foreigners or domestic investors.

Reinhart and Rogoff also pull out examples of sovereign defaults way back in history without any recognition that what happens in a modern monetary system with flexible exchange rates is not commensurate to previous monetary arrangements (gold standards, fixed exchange rates etc). Argentina in 2001 is also not a good example because they surrendered their currency sovereignty courtesy of the US exchange rate peg (currency board).

Further, Reinhart and Rogoff (on page 14 of the draft) qualify their analysis:

Table 1 flags which countries in our sample may be considered default virgins, at least in the narrow sense that they have never failed to meet their debt repayment or rescheduled. One conspicuous grouping of countries includes the high-income Anglophone nations, the United States, Canada, Australia, and New Zealand. (The mother country, England, defaulted in earlier eras as we shall see.) Also included are all of the Scandinavian countries, Norway, Sweden, Finland and Denmark. Also in Europe, there is Belgium. In Asia, there is Hong Kong, Malaysia, Singapore, Taiwan, Thailand and Korea. Admittedly, the latter two countries, especially, managed to avoid default only through massive International Monetary Fund loan packages during the last 1990s debt crisis and otherwise suffered much of the same trauma as a typical defaulting country.

Britain has defaulted only once in its history – during the 1930s – while it was on a gold standard. The Bank of England overseeing an economy ravaged by the Great Depression defaulted on gold payments in September, 1931. The circumstances of that default are not remotely relevant today. There is no gold standard, the sterling floats. Britain has never defaulted when its monetary system was based on a non-convertible currency.

A large number of defaults are associated with wars or insurrections where new regimes refuse to honour the debts of the previous rulers. These are hardly financial motives. Japan defaulted during WW2 by refusing to repay debts to its enemies – a wise move one would have thought and hardly counts as a financial default.

But if you consider the “virgin” list – how much of the World’s GDP does this group of nations represent? Answer: a huge proportion, especially if you include Japan and a host of other European nations that have not defaulted in modern times.

Further, how many nations with non-convertible currencies and flexible exchange rates have ever defaulted? Answer: hardly any and the defaults were either political or because they were given poor advice (for example Russia in 1998).

Reinhart and Rogoff don’t make this distinction – in fact a search of the draft text reveals no “hits” at all for the search string “fixed exchange rates” or “flexible exchange rates” or “convertible” or “non-convertible”, yet from a MMT perspective these are crucial differences in understanding the operations of and the constraints on the monetary system.

Further, if you consider the Latin American crises in the 1980s, as a modern example, you cannot help implicate the IMF and fixed exchange rates in that crisis. The IMF pushed Mexico and other nations to hold parities against the US dollar yet permit creditors to exit the country. For Mexican creditors this meant that interest returns sky-rocketed (the interest rate rises were to protect the currency) and the poor Mexicans wore the damage.

It was clear during this crisis that the IMF and the US Federal Reserve were more interested in saving the first-world banks who were exposed than caring about the local citizens who were scorched by harsh austerity programs. Same old, same old.

So when the BIS General Manager says:

When sovereign debt morphs from a risk-free into a “credit risk” instrument, the consequences are likely to be severe. They are likely to include disruption to the financial system and abrupt deleveraging by banks, harming the real economy and employment.

All we are talking about are the EMU nations which all raise debt in a foreign currency – the Euro!

There are no general insights that he is offering.

The second speech is from the same presenter – Why central bank balance sheets matter – and was given in Thailand on December 12, 2011 at a Bank of Thailand conference. One wonders whether he just skips around the World like this misleading his listeners in between staying at sumptuous hotels and wining and dining in fine style.

This Speech extends the misinformation and focuses on his assertion that “one of the lessons of the recent crisis is that more attention must be paid to balance sheets than was the case before the crisis”.

He notes that from inception “central banks were given the monopoly of note issue, and the role of lender of last resort naturally fell to them” and says:

During times of financial distress, only the central bank could be a credible lender of last resort. Its ability to create monetary liabilities could be used to provide liquid assets to a bank in difficulty.

That is, the government. In the EMU case, this “government” role is ceded to the ECB which is unelected and unaccountable. But the capacity remains even in the Eurozone. The ECB can “fund” all government deficits without issue and should be doing that at present given the huge real output gaps and zero inflation risk.

The BIS General Manager’s aim is to use the fact to outline “the special role that central bank balance sheets have played historically in ensuring monetary and financial stability”. But he is wanting to elicit caution – mainstream caution:

Central banks have been ready to buy a wide range of financial assets on a large scale in order to further major macroeconomic and financial stability objectives. Because the scale and persistence of the worldwide expansion in central bank balance sheets are unprecedented, we need to pay special attention to possible medium-term risks.

The risks he outlines are:

Risk 1. The “central bank’s balance sheet becomes more exposed to market developments – a fall in the value of foreign assets or a rise in long-term interest rates could reduce the value of its assets while leaving the value of its liabilities intact”.

By which he means that in an accounting sense “the capital of the central bank could be put at risk”. That is, the central bank might find itself with negative equity.

Does this matter? For a private bank it means the end. For a central bank that is as the “only … credible lender of last resort” how could it ever matter?

First, it would not mean anything in terms of the central bank’s capacity to meet any financial obligations that the it might have. There can never be a “run” on the central bank because its monetary liabilities are non-redeemable and all assets and liabilities are denominated in the specific currency of issue. It can always pay interest on reserves if it chooses and provide reserves as required.

Further, the private analogy is inapplicable in the same way that the household-government budget analogy is flawed when applied to a fiat monetary system.

For a private corporation (like a commercial bank), they would have to swap sound assets for equity when recapitalising. This would not apply to a central bank. Assume it might need to recapitalised at some point for accounting purposes.

So how can it recapitalise? Answer: the government (or itself in the case of the ECB) can just give “its” central bank whatever value of government bonds are required to recapitalise it is a formal balance sheet sense. Simple as that!

Some would reply by saying this would be politically costly or amount to a loss of central bank independence. It might have political consequences but just as the ECB has become a quasi “fiscal authority” in the Eurozone to stop that system imploding (it will implode if they stop) all manner of contrivances emerge very quickly in modern politics to “save the day”.

For example, the US Treasury would not hesitate to “bail” the Federal Reserve out if required. It cannot go broke. The US government is never revenue constrained because it is the monopoly issuer of the currency. It is not a household nor a private corporation.

And when you read the BIS General Manager’s speech you will find that the “negative equity” issue is not a financial one. He says:

This could in some circumstances raise unwarranted political questions and may even undermine the central bank’s credibility. A country is better off if the central bank has the financial strength needed to carry out its functions. It is of course the macroeconomic and financial stability of the country that should determine the policy decisions of the central bank, and not profit or loss implications for the central bank’s balance sheet.

The point is that these “issues” or “constraints” are totally manufactured by the dominant neo-liberal ideology. When it comes to the crunch – the “profit or loss implications for the central bank’s balance sheet” are sideshows and the central bank has to be focused on the “macroeconomic and financial stability of the country”.

… does the expansion of central bank balance sheets risk creating inflation? A preliminary answer is “not necessarily” … There has been little correlation in recent years between the expansion of central bank balance sheets and inflation. This is true both for emerging economies and for advanced economies.

But … without any evidence to back up the statement – the BIS General Manager cannot help himself:

But the ultimate answer to this question about inflation might be “not yet”.

When?:

Much will depend on whether governments in the advanced countries take decisive action in the years ahead to curb future fiscal deficits in a durable way. The very high and growing levels of public debt in many countries raise uncomfortable questions for central banks not only about the creditworthiness of the sovereign but also about fiscal dominance.

This has nothing to do with the question he is posing. If government deficits continue to grow and push nominal aggregate demand growth beyond the capacity of the real production sector to absorb it via increased output then of-course inflation is the result. That goes for any of the components of spending – private consumption, investment, and net exports.

It seems they pay very high salaries for their senior officials to swan around the world appearing at conferences that the BIS jointly sponsor and spreading propaganda about the way the monetary system functions and the implications for the real economy.

Most of what the BIS General Manager noted in these two speeches – in the context of government policy – was false.

Somewhat related aside

Rupert Murdoch seems not to understand how fiat currency systems work. The Melbourne Age (January 2, 2012) reported – New to Twitter: the tweet Murdoch took down … fast – that the media boss has just begun to tweet and is already getting into hot water.

The following graphic is of a tweet that he quickly deleted after it caused some angst.

Britain cannot go broke – it issues its own currency. Once the British government actually works out what that means and starts conditioning the political process accordingly then they will be in a better position to do what they are elected to do – advance the prosperity of the British people.

As it stands, the Government actually thinks (by its actions) that it can go broke – although clearly that is a ruse to finish of the neo-liberal agenda of reducing the welfare net and making it easier for the capital class to capture an even larger share of real national income.

Total aside

My new year’s resolution was to write (slightly) shorter blogs. The problem I face is clear to me even if it is not to others. Many commentators – especially those who are new to my blog and who haven’t the desire to take stock of several years of writing already take exception to some ideas they read as if I haven’t thought of all the most obvious issues that might arise.

This has been very apparent in the recent kerfuffle about the central place that employment guarantees occupy in MMT. It is simply impossible to cover all tracks in a single blog and it be would be very boring to regular readers if I tried.

So I try to strike a balance and make sure that I don’t just leave key propositions as single line assertions which would make the obvious retort that I am a crazy, ideologue even more attractive to new readers.

We are working on a FAQ and once that is in place I will be able to shunt obvious issues off to that resource.

But the reality is that the concepts being discussed are often not intuitive and for most they are difficult to grasp. The explication of a different way of thinking about macroeconomics to an audience that has been thoroughly ground in the mainstream – either through formal training in economics or through the relentless output of the financial media – is not an easy task.

As we have seen recently, even some who claim to be at the forefront of MMT blogging – miss essential features of the approach that we have been developing.

The upshot is that the blogs are longer than short. But I always aim to make them shorter.

33 Responses to BIS now part of the neo-liberal propaganda apparatus

Please don’t make them shorter Bill.
Most of us have attention spans that are longer than a newt’s even if some don’t and need the comic book version. Leave us to do the short versions as we spread the word.
This stuff is important

“If the UK is already meeting a larger percentage of its budget deficit by seigniorage than Weimar Germany did at the height of its hyperinflation, why is the pound now worth about as much on foreign exchange markets as it was nine years ago, under circumstances said to have driven the mark to a trillionth of its former value in the same period, and most of this in only two years? Meanwhile, the U.S. dollar has actually gotten stronger relative to other currencies since the policy was begun last year of massive “quantitative easing” (today’s euphemism for seigniorage).”http://www.prosperityagenda.us/node/200

Without a definition of ‘default’, history is difficult to present objectively. For example, in the 1970s, the USA defaulted on its international monetary obligations. She failed to deliver in gold, as required under the contractual arrangements at the time. Earlier on two States in the USA, one of them being Maryland, defaulted on loans to the UK. These examples are missing in the interpretation.

On ‘fiscal buffers’. This term is also not well defined. Nevertheless, it may be good enough to point out that Australia does not fit the interpretation given because Australia did follow a policy of national debt reduction by running surpluses. Similarly, Germany had substantial budget deficits after the unification requiring an explicit violation of the Maastrich treaty conditions. A special but temporary tax on high income earners together with a ‘tighter’ fiscal policy resulted in a reduction in government debt.

Financial instability is also not defined. The default of Lehman in 2008 was but the symptom of an impending catastrophic point (total international financial system failure); the most severe form of financial instability. In August 2011 the debt ceiling crisis in the US, a consequence of the 2008 crisis (privately generated debt, denominated in US currerency units, was converted to sovereign debt) caused gyrations on international financial markets. To say these are not examples of severe financial instability, while the Euro is, constitutes in IMHO an example of a biased view.

While I am very sympathetic to the blight of unemployed and the growing number of working poor, I do not appreciate a ‘theory’ in search of a problem.

re the footnote about Britain going broke. Yes, it prints it’s own money, but if you print too much of it, how much would your money be worth then? Wouldn’t that at some point equate to going broke, since Britain depends on imports?

jmlima,
“but if you print too much of it, how much would your money be worth then?”

You confuse “printing money” with ‘allowing an accumulation of excess reserves in the banking system’. Reserves don’t expand broad-money therefore there is no inflation risk, beyond some very temporary speculation. It is the government’s deficit which increases spending in the economy, and which, therefore may carry some enduring inflation risk if it is excessive.

First, excess reserves do not cause any enduring reduction in the value of your currency, which is even more the case when most of your trading partners are doing the same thing, including the EU.

Second, these excess reserves are typically ‘drained’ by moving them to an interest earning account at the central bank. This is purely psychological and not really necessary anyway, but makes currency speculators even more happy.

As you mention, it’s possible that you have already tackled this issue. Sorry if I’m already asking something solved.

Regarding this “If government deficits continue to grow and push nominal aggregate demand growth beyond the capacity of the real production sector to absorb it via increased output then of-course inflation is the result”

How do you determine “the capacity of the real production sector”? It seems to me quite complex since you have to measure many variables. It could be the case, that these indicators were not accurate or missinterpreted by goverment and the measures to control inflation would come into action too late. Could it be the case?

Postkey, That great article you linked to about the Nazi financial system reminded me about a much older “tally stick” fiat monetary system that was used in England: http://www.freeread.com/archives/3012

Postkey, I think a critical difference between the tally stick system and the Nazi finance system was that the talley sticks were all regularly collected as tax (a balanced budget after, ofcourse, the 100% deficit when the system was initiated) and did not pay interest. The tally stick system worked well for centuries. The Nazi system worked well for a handfull of years but that certainly is no indication that it was a sustainable system. The euro worked well enough over that sort of time frame afterall.

Good stuff Bill. I for one like the long posts. But if you kept the long stuff along with some shorter and more digestible bits that were augmented by links to the longer posts, that might help for those of us who like to tweet and link to your work to promote MMT ideas. We Americans have short attention spans!

During the initial debate on QE a couple of years ago , one frequently ran into commentators asserting that there was real risk of Fed “bankruptcy”, which seems utterly crazy to me. But others argued that while there was no real risk of Fed bankruptcy, if the Fed went into a negative equity position, it would have to be bailed out by the Treasury. This makes no sense to me at all. How could the Fed – the de facto monopoly money issuer in the US be “bailed out” by the Treasury, which is a de facto money user in the US. (I know the Fed retains some monetary authority in principle through its potential use of large coin seignorage. But this is a power which it doesn’t use, and I can’t think that has anything to do with what the folks talking about a bailout have in mind.)

I have a feeling that there is some mass of legal and accounting fictions in play here, that serve to hide the monetary sovereignty of the US government from its people under a veil of institutional obfuscation. Can someone point me in the direction of a cogent discussion legalities that apply? Does the Fed have a capital requirement? If the Fed was in a negative equity position, what legal rules or contingencies come into play? Would the Fed somehow be required to borrow from the Treasury by issuing bonds that the Treasury purchases, but which would then be redeemed through open market operations involving Treasury bonds?

@ Dan K:
Dan,
Beowulf and Joe Firestone ran the coin issue back a few months ago and have
the legal issues around the coin seignorage. Which I believe is a Treasury
legal capability vice a Fed capability. Perhaps here is a link for you that has other legal references…

Here is a link to the entire FRA it is not that long a read, I would think any capitalization requirements would have to appear here in this act, if capitalization of the Fed is not addressed, then I would think legally the Fed wouldn’t have any capitalization requirements, I’ll give it a look…:

“http://www.federalreserve.gov/aboutthefed/fract.htm”

The way I look at it, if it isn’t in the FRA, then it is a dogma or better like you term
‘a veil of institutional obfuscation’. This is the key Section 15 of the Act, Government Deposits:

“1. Federal Reserve Banks as Depositaries and Fiscal Agents of United States

The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”

That is it…. The veil of institutional obfuscation is woven out of all of the dogmas that are in excess of this very limited paragraph which reads to me like Treasury is of course in charge and may use the Fed as it’s fiscal agent if it wants to, otherwise Treasury can make other arrangements to issue and tax the currency .

Ernestine Gross says, “I do not appreciate a ‘theory’ in search of a problem.”

What are we to make of this oblique comment? I assume MMT, or at least the MMT conditioned argument in the original post, is being designated a “theory”. That is to say, it is not a theory but a faux theory apparently. This must be opposed to the “real” theories held by current orthodox economics. However, theories are not faux or real in themselves, they are simply theories. A cogent empirical theory (good theories do at least have to be cogent) will link its elements and propositions with rules expressible as laws of relation (usually mathematical) and will propose empirical tests to enable (conditional) proof or clear falsification of the key propositions. (Proof is always conditional and operational but it would take too long to go into that here.)

A consistent feature of current orthodox economics is to think their theories (and only their theories) are “real”. “Real” in this sense actually means “dominant ideological discourse”. Current orthodox economics shies away from and denies the results of empirical tests of its theory because these empirical tests falsify almost the entirety of current orthodox economics discourse (neoclassical economics).

It should be no surprise that the majority of economists (the neoclassical economists) are wrong. It is a consistent feature of all human societies that the majority are wrong about most non-trivial matters. (This fact does not obviate the affirmative argument for democracy by the way, but that is another argument.) I can advance a non-metaphysical argument to demonstrate that the majority are wrong about most non-trivial matters but it would take us off-topic. Essentially though, it points out that in most controversies of a physical or metaphysical nature involving 3 or more competing points of view, it is often the case that no single view commands a majority. (Few important controversies involve pure binary positions.) Thus if any one view is right then the majority are wrong. It is also possible, indeed probable, that in some controversies all views are wrong.

By way of that detour we get back to the current neoclassical economic consensus, the dominant ideology which is both wrong and empirically demonstrably so. Heterodox economists like Bill Mitchell and Steve Keen (to name Australians as that is where my contemporary reading goes) have conclusivey demonstrated the false nature of neoclassical economics (ie. current economic orthodoxy). I am fully convinced but it is not up to me to re-hash (imperfectly) their arguments here. Read their works and then perhaps read Ozymandias by Shelley. I guess the cognitive dissonance of realising they have committed a life and career to a degenerate research program (in the Imre Lakatos sense) is just too much for some people.

“…It is a consistent feature of all human societies that the majority are wrong about most non-trivial matters. I can advance a non-metaphysical argument to demonstrate that the majority are wrong about most non-trivial matters but it would take us off-topic”

Really? Please devise it! I would like to see this non-metaphysical argument that does not collapse into (logically indefensible) a priori privileging! Indeed, if ‘right’ and ‘wrong’ were self-evident there would be no need for theories, no need for schools of thought, no need for values, no need for opinions, no need for alternatives. The world would be as inane as delegating government to a panel of logic professors. Furthermore, if all knowledge is contingent, then it is not a question of ‘right’ or ‘wrong’, it is a question of context (or choice amid uncertainty). But it appears commentator Ikonoclast communes regularly with the Almighty. So in the words of Locke, “show us this Charter From Heaven and let us see…” that the majority is ‘wrong’.

On a broader note, I’d like to see what Post Keynesian’ and MMT has to say on these matters:

* What about principal-agent failure? After all, what’s the point of discussing competing macroeconomic theories if (as predicted by public choice theory) the political agents empowered to choose between them are adversely selected to go and do something completely perverse anyway?
* When is there any discussion at all on the topic of rents or land speculation in MMT? What about the replacement of traditional business taxes with rent tax to remove the tax burden on ordinary returns by targeting windfall and incumbency rents instead, especially given taxes do not government expenditure, but rather should aim at the duel goal of social equality and economic efficiency?
* What about he correlation between happiness and status, a positional good which cannot be increased in aggregate by any increase in “output” (and which may actually be reduced for most people by attempts to do so)?

Well, Ikonoclast, what is the problem to which MMT provides a theoretical solution? I can’t find it, either in terms of existing theoretical knowledge or in terms of the history of empirically observable events since about 1950. (Mainstream economics is much more than 101 macroeconomics.)

“especially those who are new to my blog and who haven’t the desire to take stock of several years of writing already take exception to some ideas they read as if I haven’t thought of all the most obvious issues that might arise.”
“It is simply impossible to cover all tracks in a single blog and it be would be very boring to regular readers if I tried.”
The “tracks” point out to me what I don’t fully understand and what I need to look into more or pay more attention to when I run across these ideas.

Stephen Spadijer has clearly not read my claim carefully enough. He assumes that because I claim to know the majority are wrong are about most non-trivial matters I am thus claiming that I know what is right. This is not my claim and that construction of it does not in any way logically follow from my carefully worded claim. It is possible to prove the majority are wrong (on a specific question) without knowing the pertaining objective truth.

A dice is thrown by an official behind a black screen. The audience, whose view of precedings is obscured by the black screen, is told the dice is thrown and asked to guess (from 1 to 6) what is the outcome of the throw. I am there, in the audience, to make a judgement about whether the majority are wrong or not. A privileged and honest referee is there to perform the following tasks. He checks the dice is of standard design and unloaded. He checks that the audience (and I) could not see the dice throw. He walks round to check the dice throw and record the result (though the actual result is not important just that it is a valid 6 sided dice). He asks the audience to make their guesses. He collates the results of all guesses and gives them me. In all (very high) probability (with a large sample audience) the distribution of guesses will be such that no single guessed number will be represented by 50% or more of guesses. The experiment can be conducted many times if necessary to make such a probability vanishingly small.

Once I see the distribution of guesses and can ascertain that indeed no single guessed number is represented by 50% or more of the guesses then I can, without knowing the objective truth of the dice throw myelf, predict that more than 50% (i.e. the majority) are wrong aboout the objective truth.

I (and we) are in exactly the same position regarding the truth claims made by the competing major religions. Given the profound impact of religious teachings and religious beliefs we can state that religious belief (or non-belief) is a non-trivial matter. We can also (without naming them) say for the sake of argument that there are six major religious viewpoints including atheism (which we do have to name to make it explicit that atheism is included in this demonstraton as it is a religious viewpoint though not a religion per se).

The objective truth of competing religious claims is hidden behind an impenetrable veil just as the dice throw is hidden behind the black curtain. The competing relgious truth claims are distinct enough and often contain in doctrine or commentary explicit denunciations of other truth claims such that we can designate them to be mutually exclusive truth claims. Thus they are functionally as distinct as the numerals 1 to 6. Since no major religious view commands 50% or more of total adherents and since they represent mutually exclusive truth claims, I can know logically that the majority are wrong. I can know this without knowing the truth myself.

Far from meriting Locke’s condemnation, I have taken a clear empirical and one might say Humean position.

Ernestine says; “Well, Ikonoclast, what is the problem to which MMT provides a theoretical solution? I can’t find it, either in terms of existing theoretical knowledge or in terms of the history of empirically observable events since about 1950.”

I really think Bill ought to answer this as he is most qualified to do so. As a preamble, I might say I find it possibly revealing that the question is couched as “What is the problem to which MMT provides a THEORETICAL solution?” (Emphasis added.) One might rejoin that MMT provides practical solutions and it is the practical solutions that matter.

However, in Ernestine’s defence she may have meant “What is the practical problem to which MMT provides a theoretical solution yet to be tested in practice.” I never quite know what Ernestine is driving at as I find her a little too succint, somewhat elliptical and thus cryptic. Perhaps that is because of my limitions in not understanding some standard economic shorthand.

The practical problem “clump” in the current economy as managed is;

(a) the inability to maintain full employment;
(b) the under-utilisation of productive capacity that that implies;
(c) the individual and social damage that inflicts;
(d) the targetting of inflation and other second order problems rather than the first order problems above;
(e) the specious model of money creation contained in standard (neoclassical) economics;
(f) the specious committment to balanced or surplus budgets even in recessions;
(g) the reduction in the wage share of national income;
(h) the adoption of unsustainable debt fuelled growth to cover for (g);
(i) the general tendency to ignore the role of finance in the crisis; and
(j) the failure to regulate finance and the markets adequately.

Now, some more orthodox economists see some of the above as problems (or even rarely all of the above as problems) but they are hobbled in propounding solutions by not understanding how the modern money system really works. They baulk at shadows and demand such things as balanced budgets over the cycles a an a priori requirement rather than letting the real system tell them what budget settings is needed. They suscribe to fallacies like the NAIRU. They deny that stimulating employment will stimulate aggregate demand and thus not automatically cause inflation. They caused the GFC crash, failed to predict it, failed to understand it, panicked and did some Keynesian/MMT stimulus against all their theory, then pulled back just as it started working, then went back into total denial with their old unaltered theories. This is the economic orthodoxy in practice in business and government even if it is a parody of more considered and learned academic economic orthodoxy such as your own.

Those who support the status quo of orthodox economic management are thus supporting inequality, poverty, inefficiency, declining real wages, rising debt, under-utilisitation of productive capacity when a possible solution is at hand. I say why not try a full MMT experiment in single country? New Zealand would be a good candidate. The world community could agree to run a full MMT experiment in NZ, put checks and balances in place to ensure that vindicative bond and currency attacks are not made to destroy the experiment and also indemnify NZ. That is to say if the experiment is a real world disaster debunking MMT prescriptions then NZ (after say 10 years or less if the populace demand an end to the experiment in concurrent referredums at each national election) would be fully bailed out by interantional funds and put a more orthodox footing once again. Can’t say fairer than that. Let’s have a real world test.

BIS has produced interesting work papers that occasionally contradict or challenge the conventional wisdom, but there’s a clear disconnect between the research and the upper management, who are basically doing politics more than anything else, which means they have to toe the line and hew to the dominant ideology. It’s not unlike the IMF, which has sometimes published fairly surprising things, considering its actual policies.

Over at Steve Keen’s site one of the posters came up with a paper from the Bank of England where some of the economists there had tried to reconstruct flows of funds and balance sheet in a Godley type way.

This paper considers a flow-of-funds approach that stresses the role of asset prices, credit and balance sheets. This framework is used to shine a different light on the Great Moderation in the United Kingdom. It suggests that there were linkages between many of the macroeconomic puzzles of the day and the balance sheet developments that led to financial
instability. It further argues that approaches to macroeconomics that stress the importance of balance sheet linkages might be helpful in spotting building financial fragility.

If I have misread you it is because you write without clarity and it was a random, ambiguous side-statement that you made, and not because I had not “clearly…read [your] claim carefully enough”.

I do not believe you have proved they are “wrong”, especially on “most non-trivial matters” as you initially claimed. Firstly, we can question whether religion is indeed trivial or non-trivial. I view it was trivial: whatever you may say about the influence of religion, a purely Wittgenstein perspective is meaningless and must be passed over in silence. But that is my preference. Furthermore, even if religion IS non-trivial (as it informs policy), then we must dis aggregate the policy in question. The fact there are different faiths tells us nothing about the contents of those faiths on issues that matter (intermingling between them) or where they might allow one to conclude on major policy issues: religion could appeal to some due to its practical effect of community or purity (irrespective of its actual belief – be it Christianity, or atheist), ignores that there could be overlap on the religion (most of the people could be deontologist view on issue), or that people in a faith might not agree on an interpretation on an issue, or even empirically speaking whether Judo-Christian god does not account for over 50 percent of the population. So all your have proved is not the majority is wrong, for that is contingent on the factors discussed above. That hardly says that on the big issues religious groups cannot come to the same conclusion on a policy issue (gay marriage, for example).

In any event, my point was on the “non-trivial issue” of policy even where agreement on facts could lead to different interpretations or subjective considerations. We could both agree that in a fiat currency a government is not financially constrained. This fact could allow one to conclude we should be abolishing taxes to create jobs – a ‘libertarian’ MMT flavour would simply hold these taxes serve to revenue raising purpose, but are simply job-destroying and efficient. A more ‘progressive’ would prefer a job guarantee as a first order policy decision to create jobs. Which one of these is a priori the ‘correct’ one? That is a matter of debate and preference.

Neil,
Thank you for mentioning the paper. I noticed it already on Steve Keen’s blog but I didn’t open it then.
I just have had a very quick look at it – it is certainly worth some attention. What is in my opinion missing is a clear humanly readable graphical presentation of stocks and flows. The approach used by Steve Keen which is borrowed from System Dynamics is in my opinion promising but there is obviously a serious constraint on his modelling framework. (I haven’t played with his latest program but I don’t expect it to be much different to the previous edition).
We need to draw a schematics depicting the topology of the flows either using System Dynamics symbolism or maybe borrow something either from UML or just electronic circuit schematics. I may have a go at this in a few months time as some ideas I have in regards to graphical representation of macroeconomic systems are not mature enough yet.

(a) Accept, subject to a sensible notion of employment. (This goal is not unique to MMT)
(b) Not necessarily (some people are overworked while others are unemployed). MMT has nothing to say on this point
(c)Accept. But MMT, being macro-economic in nature has nothing to offer regarding individuals.
(d) The actual problem is the mis-measurement of inflation (asset price bubble was ignored and the MMT does not offer a solution to this misallocation of credit)
(e) Please identify the ‘standard’ neoclassical economics’ model. To the best of my knowledge, there is no adequate concept of ‘money’ in macro-economics, including the MMT.
(f) This is a feature of one macro-economic school of thought but not part of mainstream economics.
(g) Wealth and income inequality is a long recognised major problem in development economics. The increase in equality in so-called developed economies is a major and recognised problem in mainstream economics. Wage share is not necessarily a relevant measure because in the so-called developed economies wage earners tend to be also shareholders, mainly indirectly via pension funds. It is wealth distribution and the related income distribution that matters. Macroeconomics has nothing to offer in this regard. For example, the enormous increase of wealth of the managerial class cannot be represented in these aggregate models.
(h) Unsustainable credit creation is empirically verified several times over (1987, 1990s, around 2001, 2007/08 and continuing. But the notion of ‘growth’ is not defined. Growth in environmental degradation? Growth is CO2 emissions? To the best of my knowledge these examples of ‘growth’ are perfectly consistent with MMT.
(i) Yes and MMT is no exception. See Radner and other authors in math econ for an alternative.
(j). Yes, but the MMT critique of the Euro countries and the MMT prescription of ‘printing money’ does not solve this problem.

So, I still don’t know what the practical problem is for which MMT offers a solution. (Yes your correction is helpful.)

The problems are too big and to interrelated to be treated by a monetary theory. IMHO, part of the difficulty in addressing these interrelated problems is the early specialisation in economics into macro-economics, micro-economics, monetary economics, finance, labour economics, resource economics, environmental economics, development economics, managerial economics, etc, etc…. down to accounting.

Your suggestion of inviting NZ as a test case, supported with an insurance policy of some sort is not an empirically valid test because NZ would have to be isolated from international trade and financial transactions during the ‘test period’, hence introducing an artificial world economy.

Ernestine, it’s really up to Bill Mitchell to “take you on” since you are comprehensively debunking (or attempting to debunk) MMT on his MMT blog. Sorry, for the crude colloquialism but I can’t immediately think of the polite intellectual and academic equivalent for “take you on”.

I do notice however, that prominent academics with conflicting ideas do at times seem chary of direct confrontations at least on blog sites. There may be good reasons for this though I do not know them.

To run though my points once again in answer to your replies;

(a) the inability to maintain full employment;

I would define full employment as occuring when the only significant unemployment is frictional unemployment which experience since WW2 shows to be about 2% of the labour force. The labour force definition in this case should comprise working age (typically 15 and above in Australia) and below retirement (around 65) people who are participating workers, that is people actively employed or seeking employment. Plus we should include discouraged workers. People not counted would include students, retired people, stay-at-home parents, people in prisons or similar institutions and people with major disabilities or handicaps. I would include in the labour force, as I said, discouraged workers who cannot find work and who have at least in the interim given up seeking work.

On this definition full employment (but allowing for frictional unemployment) is achieveable. It was achieved in Australia in the 1960s under Keynesian economic policy and Australia labour force policy of the era. Benign international and exogenous factors were no doubt contributing conditions. However, I think we can safely say that Keynesian/Functional Finance/MMT type prescriptions and the enlightened wage and labour policies of the era were necessary though not necessarily sufficient conditions for full employment.

Whether this goal and indeed other goals are unique to MMT or not is not important to me. I tend to think that few individual parts of MMT are unique. Many parts are restatements or recastings of Keynesian and Functional Finance descriptions and prescriptions. What does tend to be unique about MMT (in my perception) is its emphasis on describing the real extant money and finance system and its operations since the end of the Bretton Woods system in 1971. MMT takes more seriously than any other economic analysis (to my knowledge) the implications and realities of a full fiat currency system.

MMT differentiates more clearly between the notional system (government created and “backed” fiat money and the entire finance construct built on that) and the real system which is the exchange of real goods and services by real people. MMT realises more fully than other economic doctrine I am aware of that the fiat money system and the real economy, though both real, are real in different senses; that the former is notionally real and the latter is objectively real. Appreciating this allows a greater freedom of thought (and thus action) because it is now better understood that the only goal is or ought to be getting the real objective economy (goods and services, customers and workers characterised by real and measureable mass and energy attributes and transactions of same) to work by whatever notional operations are;

(a) required by the real economy to achieve full employment as defined; and
(b) do not break the (quasi-notional) tool being used namely the system of fiat currency, national accounts, budgets and commercial/market finacial transactions.

I say “quasi-notional” at this juncture because for sure it is not simple to say where the notional ends and the real begins when complex systems of control, command and feedback exist to link the notional to the real.

The absurdity of inflation targetting whilst ignoring or placing too low a priority on full employment targetting (an absurdity which I accept you might not support) is well illustrated by making an engine analogy. The inflation reading can be considered (somewhat) analogous to the temperature gauge on an engine. Full employment can be considered analogous to having all cyclinders of an engine firing. If an engine had an inadequate cooling system but was misfiring (not employing all cylinders) then it might stay in a safe operating temperature range because it is producing sub-optimal power (waste heat is correlated to power output). A policy of mere temperature range targetting would lead to the conclusion that the engine is fine and operating safely. However, a policy of full cylinder employment and measuring crankshaft power output would subsequently expose the inadequate or malfunctioning cooling system and lead the engineer/mechanic to work on that problem.

(b) the under-utilisation of productive capacity that that implies;

You say “Not necessarily (some people are overworked while others are unemployed). MMT has nothing to say on this point.” This I think is minor cavil. I do you the justice of assuming that you were replying quickly to a lot of dot points. If you stopped and thought more you probably could come up with more objections and arguments on this point. However, I still do not think they would hold water.

I very much doubt that MMT (in its comprehensive book-sized theory format) has nothing to say on overwork versus unemployment and under-employment and calculating the relative magnitudes of each in various contemporary economies. I also very much doubt you could say Australia (for example) is reaching full capacity utilisation and properly preparing for full capacity utilisation in future (which includes the need to train the next generation of workers properly) when youth unemployment, 15-19 years (on the official understated measure) is about 20% in Australia and 25% in New Zealand.

(c) the individual and social damage that inflicts;

You say: Accept. But MMT, being macro-economic in nature has nothing to offer regarding individuals.

This is not correct. MMT fully understood comes with prescriptions as well as descriptions; for example the specifc Job Guarantee policy and general advocacy of full employment. You need to read MMT literature. You have pigoen-holed it and dismissed it on a highly inadequate reading. This is clear from this criticism. MMT also makes theoretical links between general macro-economics theory and full employment policy via buffer stock theory. These are integrated and connected. Full employment policy is not a tack-on in MMT.

(d) the targetting of inflation and other second order problems rather than the first order problems above;

You say “The actual problem is the mis-measurement of inflation (asset price bubble was ignored and the MMT does not offer a solution to this misallocation of credit)” I agree with you here although I think that mis-measurement of inflation is part of the problem but not the whole problem. Yes, the asset price bubble was ignored and yes the misallocation and over-issuing of credit was and is a problem. MMT is not silent on these issues as you assume. Incidently, the over-focusing on headline inflation targetting leads to perverse political incentives for this inflation to be mis-measured.

You say “Please identify the ‘standard’ neoclassical economics’ model. To the best of my knowledge, there is no adequate concept of ‘money’ in macro-economics, including the MMT.”

You are the only locally blogging economist I know of who seems to pretend either that there are no competing schools of thought in economics in academia (outside of perhaps Marxist and non-Marxist) or none competing for “standard” dominance in the arena of poltical and public discourse or that the term “neoclassical economics” is unknown and undefined in all the literature or that a standard bowdlerised form of neoclassical economics is not taught at undergrad level at least extensively in the Anglophone world. Since I am sure you are not being deliberately obtuse I can only conclude that your education in economics was so standard, exclusive and thoroughly indoctrinating in the neoclassical sense that you are competely innocent of knowledge of all the competing schools of thought. I can think of no other reason for this obdurate insistence that standard neoclassical economcis does not exist as a school other than the possibility that in academia you do see genuinely competing schools but are not much aware of the public discourse and policy dominance of one sort of bowdlerized neoclassical economics (Pusey called it “economic rationalism”, a distinctly Australian term) which is frankly, wrecking our economy and peoples’ lives very badly.

(f) the specious committment to balanced or surplus budgets even in recessions;

You say; “This is a feature of one macro-economic school of thought but not part of mainstream economics.”

This would depend on your definition of mainstream economics I guess but mainstream neoclassical ecoconomics seems to adhere to this in theory even if not always in practice. However, when they panic and add liquidity (outside of Australia) they give it all to the banks who then sit on it or use it for arbitrage opportunities. “Money for nothing and the chicks are free.” – Dire Straits.

Phew, I am getting blog fatigue today and I don’t think you or anyone else will read even this far into my “rant”.

Ah, now I understand after having read Ernestine’s extensive New Year wishes.

“One of my wishes for 2012 and beyond is the fading out of macroeconomics, including the MMT – whatever it might turn out to be – as a subject of public interest. Another one is the fading out of ‘schools of thought’ in Economics.”

Ernestine goes on to (essentially) extol microeconomics.

These wishes are claims of intellectual autocracy, exclusivity and “expert preserve”. The public apparently should never take an interest in specialist theory because of misconstruction and over-simplification (real and ever-present dangers for sure). However, the alternative is to leave things to the “experts” in the form of technocratic and undemocratic control. The evidence is that the technocrats and “systems men” are wrong at least as often as the common people and that the damage from their efficiently applied but profoundly misconstrued “solutions” is probably even more extensive than the damage from mere muddling.

The wish for the fading out of schools of thought is profoundly disturbing. J.S. Mill for one would vehemently disagree. One could not even wish for the fading out of schools of thought (and even mental speculation at times) in cutting edge theroetical research in the hard sciences (for example quantum mechanics, string theory) let alone wish for it in Political Economy of which macro-economics is a part and micro-economics is a failed program.

Micro-economics is a degenerate research program (in Imre Lakatos’ terms). An understanding of the reality of emergent phenomena is enough on its own to debunk the attempt to apply single agent analysis to society.

Comment @ January 2, 22h00:
Re the following:
”Financial instability is also not defined. The default of Lehman in 2008 was but the symptom of an impending catastrophic point (total international financial system failure); the most severe form of financial instability. In August 2011 the debt ceiling crisis in the US, a consequence of the 2008 crisis (privately generated debt, denominated in US currerency units, was converted to sovereign debt) caused gyrations on international financial markets. To say these are not examples of severe financial instability, while the Euro is, constitutes in IMHO an example of a biased view. ”

This is an odd comment. You attribute to prof Mitchell something I have never seen him write. I do not recall him writing that financial instability did not result from wholesale deregulation of the financial sector and the ensuing fraud. Indeed I believe he has written the opposite, so I recommend you read some of his earlier posts on the topic if you are interested in his view on these matters.

What Prof Mitchell has in fact often written about regarding financial instability, which was clearly the object of his comment in this post, is that concerns regarding solvency and destabilising increases in interest rates are unfounded for governments that issue their own free-floating fiat currencies and incur all their financial liabilities in this currency.

Regarding problems addressed, among others, Prof Mitchell addresses the array of practical problems caused by governments adopting pro-cyclical, pro-recessionary policies that result from the unfounded concerns noted above. All clear from earlier blogs.

Comments regarding the ”mainstream”
With respect to whether the ”mainstream” of the economics profession shares these kinds of unfounded concerns or not, Prof Mitchell has also repeatedly referenced what he characterises as mainstream when he has quoted from the textbooks and other writings of G. Mankiw, O. Blanchard, and many others. Again easily found in earlier blogs.

Telling view on macro:
Ikonoclast’s quote from you about wishing for the fading out of macroeconomics is telling and would have been useful to know at the start of your comments. I do not share your view we would be better off with a pre-Keynesian understanding of the economy.

Ikonoclast, I do read your posts. I see a need to reply to a few statements.

1. I do not aim to “comprehensively debunk MMT”. I aim to find out what it is. Formal models are useful in this respect. They make clear the difference between existing theoretical knowledge and something new. Surely it is important to distinguish between a debate among economists which pivots on alternative opinions within an existing theoretical framework [eg more (less) of an ex ante government budget deficit should be planned to be paid for by means of issuing currency under given conditions] and new theoretical knowledge [which addresses a practical problem for which it can be shown that there is no adequate theoretical framework].

3. You seem to equate ‘neo-classical economics’ with ‘economic rationalism’. I don’t. As in other academic disciplines, some ideas or theoretical knowledge in a body of literature of a particular period that is labelled ‘XYZ’ (neo-classical in this case) survive the test of time and is contained in later work. This is the case with ‘neo-classical economics’ (other than simple macro-economic models and ‘economic rationalism’). I don’t like the ‘school of thought’ approach because it fosters adversarial debates for the sake of ‘winning’ instead of exposing the history of the development of theoretical and empirical knowledge in a discipline. Alternatively put, the ‘school of thought’ approach reminds me of competition for believers.

4. No, “extol micro-economics” (as in introductory textbooks) as an alternative (‘school of thought’). At the same time, even introductory micro-economic textbooks contain some ‘old’ concepts which are still of practical relevance today (eg price and income elasticities.) Note, I didn’t wish for a fading out of macro-economics but I wish for a fading out of macro-economics (and schools of thought) as a subject of public debate. Isn’t it the case that we got into a mess via the promotion (‘public debate’) of monetarism and economic rationalism? Isn’t part of the disturbing hype in the media due to the guessing of why the value of some macro-economic variables increased (decreased) on a particular day?

5. I say we have lost the art of looking at ‘the economy’ as a complex system. There are formal theoretical models (which grew out of the 1950s Arrow-Debreu general equilibrium model) that tie together the micro and macro aspects but in a very abstract manner. Nevertheless the insights gained from this research program, particularly regarding financial markets, environmental degradation and bounded rationality, are ignored ‘in the macro economic-school of thought public debate’.